Hostname: page-component-78c5997874-fbnjt Total loading time: 0 Render date: 2024-11-11T07:03:53.135Z Has data issue: false hasContentIssue false
  • English
  • Français

Polycentric banking and macroeconomic stability

Published online by Cambridge University Press:  03 March 2017

Alexander William Salter  and
Vlad Tarko
Get access Rights & Permissions [Opens in a new window]

Abstract

We contribute to the post-crisis literature on macroeconomic stability by arguing that polycentric banking systems can better achieve stability than monocentric systems. Building on the theories of E. Ostrom, we engage the literature on free banking systems to show that these systems met the requirements of polycentric governance systems, and that the unintentional result of the underlying governance institutions was macroeconomic stability. In contrast, modern central banking, because it is monocentric, lacks important features regarding knowledge aggregation and incentive compatibility conducive to generating macroeconomic stability. We conclude by discussing various legal barriers that stand in the way of a transition from monetary monocentrism to monetary polycentrism.

Type
Research Article
Information
Business and Politics , Volume 19 , Special Issue 2: Property Rights, Financial Risk, and the Politics of a Networked Global Financial System , June 2017 , pp. 365 - 395
Copyright
Copyright © V.K. Aggarwal 2017 and published under exclusive license to Cambridge University Press 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Aguiar-Hicks, Robin., Hogan, Thomas L., and Smith, Daniel J.. 2015. “Stability and the gold standard.” Working paper. Available online at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2536431.Google Scholar
Aligica, Paul Dragos and Boettke, Peter J.. 2009. Challenging Institutional Analysis and Development. New York: Routledge.Google Scholar
Aligica, Paul Dragos and Tarko, Vlad. 2012. “Polycentricity: From Polanyi to Ostrom, and Beyond.” Governance 25 (2): 237–262.Google Scholar
Aligica, Paul Dragos and Tarko, Vlad. 2013. “Co-Production, Polycentricity and Value Heterogeneity: The Ostroms’ Public Choice Institutionalism Revisited.” American Political Science Review 107 (4): 726–741.CrossRefGoogle Scholar
Aligica, Paul Dragos and Tarko, Vlad. 2014. “Institutional Resilience and Economic Systems: Lessons from Elinor Ostrom's work.” Comparative Economic Studies 56: 52–76.Google Scholar
Bagehot, Walter. 1873. Lombard Street: a description of the money market. London: Henry S. King and Co. Google Scholar
Barro, Robert J. and Gordon, David B.. 1983. “A positive theory of monetary policy in a natural rate model.” Journal of Political Economy 91 (4): 589–610.Google Scholar
Boettke, Peter J. and Aligica, Paul D.. 2009. Challenging institutional analysis and development: The Bloomington school. New York: Routledge.Google Scholar
Boettke, Peter J. and Leeson, Peter T.. 2004. “Liberalism, socialism, and robust political economy.” Journal of Markets and Morality 7 (1): 99–111.Google Scholar
Boettke, Peter J. and Smith, Daniel J.. 2013. “Federal Reserve independence: a centennial review.” Journal of Prices and Markets 1 (1): 31–48.Google Scholar
Boettke, Peter J. and Smith, Daniel J.. 2015a. “An episodic history of modern Federal Reserve independence.” Independent Review 20 (1).Google Scholar
Boettke, Peter J. and Smith, Daniel J.. 2015b. “Monetary policy and the quest for robust political economy.” GMU Working Paper in Economics No. 11-08. Available online at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1764267.Google Scholar
Boettke, Peter J., Lemke, Jayme, and Palagashvili, Liya. 2015. “Polycentricity, self-governance, and the art and science of association.” Review of Austrian Economics 28 (3): 311–335.Google Scholar
Boettke, Peter J., Lemke, Jayme, and Palagashvili, Liya. 2016. “Re-evaluating community policing in a polycentric system.” Journal of Institutional Economics 12 (2): 305–325.Google Scholar
Borio, Claudio E. V. and Disyatat, Piti. 2011. “Global imbalances and the financial crisis: link or no link?” BIS Working Paper 346. Available online at: https://papers.ssrn.com/sol3/Papers.cfm?abstract_id=1859410.CrossRefGoogle Scholar
Buchanan, James and Tullock, Gordon. 1962. The calculus of consent: logical foundations of constitutional democracy. Ann Arbor: University of Michigan Press.Google Scholar
Cachanosky, Nicolas. and Salter, Alexander W.. 2016. “The view from Vienna: an analysis of the renewed interest in the Mises-Hayek theory of the business cycle.” Review of Austrian Economics, forthcoming. Available online at: http://link.springer.com/article/10.1007/s11138-016-0340-5.Google Scholar
Calomiris, Charles W. and Haber, Stephen H.. 2014. Fragile by design: the political origins of banking crises and scarce credit. Princeton, NJ: Princeton University Press.Google Scholar
Calvo, Guillermo. 2013. “Puzzling over the anatomy of crises: liquidity and the veil of finance.” Mayekawa Lecture, Institute for Monetary and Economic Studies Conference, Bank of Japan.Google Scholar
Caplan, Bryan. 2000. “Rational irrationality: a framework for the neoclassical-behavioral debate.” Eastern Economic Journal 26 (2): 191–211.Google Scholar
Caplan, Bryan. 2001. “Rational ignorance versus rational irrationality.” Kyklos 54 (1): 3–26.Google Scholar
Carlson, J. M., and Doyle, John. 2000. “Highly Optimized Tolerance: Robustness and Design in Complex Systems.” Physical Review Letters 84 (11): 2529–32.CrossRefGoogle ScholarPubMed
Carlson, J. M., and Doyle, John. 2002. “Complexity and Robustness.” Proceedings of the National Academy of Sciences 99 (suppl 1): 2538–45.Google Scholar
Cosmides, Leda, and Tooby, John. 1994. Better than rational: Evolutionary psychology and the invisible hand. American Economic Review 84 (2): 327–332.Google Scholar
Dixit, Avinash. 1991. “Irreversible investment with price ceilings.” Journal of Political Economy 99 (3): 541–557.Google Scholar
Dixit, Avinash. 1992. “Investment and hysteresis.” Journal of Economic Perspectives 6 (1): 107–132.Google Scholar
Dixit, Avinash. 1995. “Irreversible investment with uncertainty and scale economies.” Journal of Economic Dynamics and Control 19 (1–2): 327–350.CrossRefGoogle Scholar
Dixit, Avinash., and Pindyck, Robert. 1994. Investment under uncertainty. Princeton, NJ: Princeton University Press.Google Scholar
Dowd, Kevin., eds. 1992. The experience of free banking. New York: Routledge.Google Scholar
Dowd, Kevin. 2015. “Free banking.” In The Oxford handbook of Austrian economics, edited by Boettke, P. and Coyne, C.. Oxford: Oxford University Press.Google Scholar
Fink, Alexander. 2014. “Free banking as an evolving system: the case of Switzerland reconsidered.” Review of Austrian Economics 27 (1): 57–69.Google Scholar
Friedman, M. and Schwartz, A.. 1963. A monetary history of the United States. Princeton, NJ: Princeton University Press.Google Scholar
Gigerenzer, Gerd, ABC Research Group, and Todd., Peter M. 1999. Simple Heuristics That Make Us Smart. New York: Oxford University Press.Google Scholar
Gigerenzer, Gerd, Hertwig, Ralph, and Pachur, Thorsten, eds. 2011. Heuristics: The Foundations of Adaptive Behavior. Oxford: Oxford University Press.Google Scholar
Gorton, Gary, and Metrick, Andrew. 2010. “Regulating the Shadow Banking System [with Comments and Discussion].” Brookings Papers on Economic Activity, 261–312.Google Scholar
Gorton, Gary. 2014. “The Development of Opacity in U.S. Banking.” Yale Journal on Regulation 31: 825–51.Google Scholar
Gorton, Gary and Donald, J. Mullineaux. 1987. “The joint production of confidence: endogenous regulation and nineteenth century commercial-bank clearinghouses.” Journal of Money, Credit, and Banking 19 (4): 457–68.Google Scholar
Hayek, Friedrich A. 1948. Individualism and economic order. Chicago: University of Chicago Press.Google Scholar
Hayek, Friedrich A. 1960. The constitution of liberty. Chicago: University of Chicago Press.Google Scholar
Hayek, Friedrich A. 1976. Choice in currency: a way to stop inflation. London: Institute of Economic Affairs.Google Scholar
Hendrickson, Joshua R. and Salter, Alexander W.. 2016. “Money, liquidity, and the structure of production.” Journal of Economic Dynamics and Control 73: 314–28.Google Scholar
Hetzel, Robert L. 2012. The Great Recession: market failure or policy failure? Cambridge: Cambridge University Press.Google Scholar
Hogan, Thomas L. 2015. “Has the Fed Improved U.S. Economic Performance?” Journal of Macroeconomics 43 (1): 257–266.Google Scholar
Hogan, Thomas L., Le, Linh, and Salter, Alexander W.. 2015. “Ben Bernanke and Bagehot's Rules.” Journal of Money, Credit and Banking 47 (2–3): 333–348.Google Scholar
Koppl, Roger. 2002. Big players and the economic theory of expectations. London: Routledge.Google Scholar
Koppl, Roger. 2014. From crisis to confidence: macroeconomics after the crash. London: Institute of Economic Affairs.Google Scholar
Kydland, Finn E. and Prescott, Edward C.. 1977. “Rules rather than discretion: the inconsistency of optimal plans.” Journal of Political Economy 85 (3): 473–492.Google Scholar
Leeson, Peter T. and Subruk, Robert J.. 2006. “Robust political economy.” Review of Austrian Economics 19 (2): 107–111.Google Scholar
Leijonhufvud, Axel. 2009. “Out of the corridor: Keynes and the crisis.” Cambridge Journal of Economics 33 (4): 741–757.Google Scholar
Mankiw, N. Gregory. 2006. “The macroeconomist as scientist and engineer.” Journal of Economic Perspectives 20 (4): 29–46.Google Scholar
McGinnis, Michael, ed. 1999. Polycentricity and Local Public Economies. Ann Arbor, MI: University of Michigan Press.Google Scholar
Miller, John H. and Page, Scott E.. 2007. Complex Adaptive Systems: An Introduction to Computational Models of Social Life. Princeton, NJ: Princeton University Press.Google Scholar
Niskanen, William. Jr. [1971] 2007. Bureaucracy and representative government. Piscataway, NJ: AldineTransaction.Google Scholar
Ostrom, Elinor, ed. 1976. The Delivery of Urban Services. Beverly Hills and London: Sage.Google Scholar
Ostrom, Elinor. 1990. Governing the commons: the evolution of institutions for collective action. Cambridge: Cambridge University Press.Google Scholar
Ostrom, Elinor. 1998. “A behavioral approach to the rational choice theory of collective action.” American Political Science Review 92 (1): 1–22.Google Scholar
Ostrom, Elinor. 1999. “Polycentricity, Complexity, and the Commons.” The Good Society 9 (2): 37–41.Google Scholar
Ostrom, Elinor 2005. Understanding institutional diversity. Princeton, NJ: Princeton University Press.Google Scholar
Ostrom, Elinor 2010. “Beyond markets and states: polycentric governance of complex economic systems.” American Economic Review 100 (3): 641–672.Google Scholar
Ostrom, Vincent 1997. The meaning of democracy and the vulnerability of democracies: a response to Tocqueville's challenge. Ann Arbor: University of Michigan Press.Google Scholar
Ostrom, Vincent [1971] 2008a. The political theory of a compound republic: designing the American experiment. Plymouth, MD: Lexington Books.Google Scholar
Ostrom, Vincent [1973] 2008b. The intellectual crisis in American public administration. Tuscaloosa, AL: University of Alabama Press.Google Scholar
Page, Scott E. 2007. The Difference: How the Power of Diversity Creates Better Groups, Firms, Schools, and Societies. Princeton, NJ: Princeton University Press.Google Scholar
Pennington, Mark 2011. Robust political economy: classical liberalism and the future of public policy. Northampton: Edward Elgar.Google Scholar
Romer, Christina D. 1999. “Changes in business cycles: Evidence and explanations.” Journal of Economic Perspectives 13 (2): 23–44.Google Scholar
Rothbard, Murray. 1960. “The politics of political economists: comment.” Quarterly Journal of Economics 74 (4): 659–665.Google Scholar
Taylor, John B. 2007. “Housing and monetary policy.” National Bureau of Economic Research Working Paper No. 13682. Available online at: http://www.nber.org/papers/w13682.Google Scholar
Taylor, John B. 2009. Getting off track: how government actions and intervention caused, prolonged, and worsened the financial crisis. Stanford, CA: Hoover Institution Press.Google Scholar
Salter, Alexander W. 2013. “Not all NGDP is created equal: a critique of Market Monetarism.” Journal of Private Enterprise 29 (1): 41–52.Google Scholar
Salter, Alexander W. 2014. “Is there a self-enforcing monetary constitution?” Constitutional Political Economy 25 (3): 280–300.Google Scholar
Salter, Alexander W. 2016. “Robust political economy and the lender of last resort.” Journal of Financial Services Research 50(1): 1–27.Google Scholar
Salter, Alexander W. and Smith, Daniel J.. 2016. “What you don't know can hurt you: knowledge problems in monetary policy.” Working paper. Available online at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2741289.CrossRefGoogle Scholar
Schuler, Kurt. 1992. “The world history of free banking.” In The experience of free banking, edited by Dowd, K.. London: Routledge.Google Scholar
Sechrest, Larry J. 2008. Free Banking: theory, history, and a laissez-faire model. Auburn, AL: Ludwig von Mises Institute.Google Scholar
Selgin, George. 1988. The theory of free banking: money supply under competitive note issue. New York: Rowman & Littlefield.Google Scholar
Selgin, George. 1994. “Free banking and economic control.” Economic Journal 104 (427): 1449–1459.Google Scholar
Selgin, George. 2012. “L Street: Bagehotian prescriptions for a 21st century money market.” Cato Journal 32 (2): 303–332.Google Scholar
Selgin, George, Lastrapes, William D., and White, Lawrence H.. 2012. “Has the Fed been a failure?” Journal of Macroeconomics 34 (3): 569–596.Google Scholar
Selgin, George, and White, Lawrence H.. 1994. “How would the invisible hand handle money?” Journal of Economic Literature 32 (4): 1718–1749.Google Scholar
Smith, Vera C. [1936] 1990. The rationale of central banking and the free banking alternative. Indianapolis, IN: Liberty Fund.Google Scholar
Smith, Vernon. 2008. Rationality in Economics: Constructivist and Ecological Forms. Cambridge: Cambridge University Press.Google Scholar
Stringham, Edward 2015. Private governance: creating order in economic and social life. New York: Oxford University Press.Google Scholar
Sumner, Scott. 2011. “Re-targeting the Fed.” National Affairs 9 (Fall).Google Scholar
Sumner, Scott. 2012. “How nominal GDP targeting could have prevented the crash of 2008.” In Boom and bust banking: the causes and cures of the great recession, edited by Beckworth, D., Oakland, CA: Independent Institute.Google Scholar
Sumner, Scott. 2015. “Nominal GDP futures targeting.” Journal of Financial Stability 17: 65–75.Google Scholar
Taylor, John. 2012. “The dangers of an interventionist Fed.” Wall Street Journal, 29 March (Accessed 5 January 2017).Google Scholar
Tullock, Gordon. 2005. Bureaucracy. Indianapolis, IN: Liberty Fund.Google Scholar
von Mises, Ludwig. 1944. Bureaucracy. New Haven, CT: Yale University Press.Google Scholar
Wilson, David Sloan, Ostrom, Elinor, and Cox, Michael E.. 2013. “Generalizing the core design principles for the efficacy of groups.” Journal of Economic Behavior & Organization 90 (Supplement): S21–S32.Google Scholar
White, Lawrence H. 1989. Competition and currency: essays on free banking and money. New York: New York University Press.Google Scholar
White, Lawrence H. 1995. Free banking in Britain: theory, experience, and debate, 1800–1845. 2nd ed. London: Institute of Economic Affairs.Google Scholar
White, Lawrence H. 1999. The theory of monetary institutions. Oxford: Blackwell.Google Scholar
White, Lawrence H. 2008. “Is the gold standard still the gold standard among monetary systems?” Cato Briefing Papers 100.Google Scholar
White, Lawrence H. 2012. “Making the transition to a new gold standard.” Cato Journal 32 (2): 411–422.Google Scholar
White, Lawrence H. 2014. “The troubling case of suppression of competition from alternative monies: the case of the Liberty Dollar and e-Gold.” Cato Journal 34 (2): 281–301.Google Scholar
White, Lawrence H. 2015a. “Free banking in theory and history.” In Renewing the search for a monetary constitution, edited by White, L., Vanberg, V., and Köhler, E.. Washington, DC: Cato Institute.Google Scholar
White, Lawrence H. 2015b. “The merits and feasibility of returning to the gold standard.” Journal of Financial Stability 17 (2): 59–64.Google Scholar
Yeager, Leland B. 1997. The fluttering veil: essays on monetary disequilibrium. Indianapolis, IN: Liberty Fund.Google Scholar